Recycled Diamonds, Is the Party Over?

February 27, 14by Edahn Golan

Depending on where you are in the diamond value chain, recycled diamonds are either a great way to make money, or a pain to earnings and margins. Until a few years ago, recycled diamonds, (i.e. previously owned by consumers), were such a small part of diamonds in a store that they were negligible in terms of the industry’s economy. However, according to estimates published by Chaim Even Zohar in the past few years, as much as a billion dollars worth of diamonds are flowing back into the system from consumers.

The surge in recycled diamond offerings was caused by the 2008-2009 financial crash and the subsequent recession. All of a sudden, many Americans stood to lose their homes because of difficulties in meeting mortgage payments. The need to tighten the belt as many lost their jobs or suffered from pay cuts, while their financial obligations continued to increase, forced many to consider selling some personal goods to protect other holdings.

Collectibles, cars, baseball cards and other valuables, such as grandma’s old jewelry, were sold at a rate not seen before and as a result, in 2009 recycled diamonds became a growing part of retailers’ offerings.

At $1 billion in estimated annual sales globally, recycled diamonds constitute more than 4 percent of diamonds sold by retailers in 2011, according to Even Zohar. In 2012, the market share of recycled diamonds increased to 5.5 percent on an estimated supply of $1.2 billion.

Retailers love these goods. Together with trade-ins, where a client replaces the diamond in a jewelry item with a nicer or bigger diamond, retailers added to their inventory diamonds that cost them less (sometimes a lot less) than when they buy from wholesalers. Sold at full retail price or even at a modest discount, retailers make a far wider margin with these goods: anywhere from 50 percent to a few hundred percent. No doubt, retailers love this revenue stream.

Wholesalers, naturally, are less enthusiastic. Wholesalers’ margins are typically very slim, around 3-5 percent at best, and therefore wholesalers don’t have the ability to compete with consumers that are desperate to sell old diamonds and uninformed about wholesale prices. Losing 5.5 percent of their business is a serious blow to wholesalers. There is no doubt this was a contributor to the large overhang (growing inventory held by manufacturers) experienced in 2011.

Growing by 20 percent between 2011 and 2012, have recycled diamonds continued to grab market share in 2013 as well? According to our anecdotal information, the answer is no. It seems that the improved economic scenario has taken away much of the motivation consumers had to offload their old jewelry.

Not only is the housing market improving in the US, but the global economy in general is slowly improving, even in battered Europe. With a wild rally at some of the world's largest stock markets in 2013, consumers feel less distressed.

For retailers, trade-ins will continue to provide them with nice margins. Further up the diamond pipeline, pawnshop owners learned the value of diamonds and are selling them for more, mainly to manufacturers that re-polish, clean and certify the diamonds and sell them to retailers at regular wholesale prices, or at a small discount. Recycled goods will continue to be part of the landscape; however, until the next major economic crash, the recycled diamond party is winding down.